Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual franchisees whereby the franchisor grants its individual franchisees the right, and imposes the obligation to conduct a business in accordance with the Franchisor’s concept. The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and/or service mark know-how, business and technical methods, procedural system, and other industrial and/or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between the parties to this purpose.

Thinking about buying into a franchise system? You need to understand exactly how franchising works, what fees are involved, and what is expected of you from the franchise company. An individual who purchases and runs a franchise is called a “franchisee.” The franchisee purchases a franchise from the “franchisor.” The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time, franchise fee to the franchisor. Franchising has become one of the most popular ways of doing business in today's marketplace.

Franchising helps individuals be their own boss and own and operate their own business. Franchising allows entrepreneurs to be in business for themselves, but not by themselves. There is usually a much higher likelihood of success when an individual opens a franchise since a proven business formula is in place. The products, services, and business operations have already been established. There are many advantages to buying a franchise. Some of these are:

• Corporate image -- The corporate image and brand awareness of the company is already established
• Consumers are always more comfortable purchasing items from a familiar name or company they trust
• Training -- The franchisor usually provides extensive training and support to the franchise owner
• Savings in time -- Since the franchise company already has the business model in place you can focus on running a successful business

The relationship between franchisor and franchisee is controlled by a contract which defines a series of duties, obligations, and promises. The franchisor does the following:

• Grants a license to use and display proprietary marks
• Provides a marketing plan
• Grants the right to utilize all of its know-how related to operation of the franchise
• Provides a manual that details operational systems and procedures
• Grants the right to operate the franchise system for a fixed period of time

Provides specifications, standards or duties for:

• Accounting and reporting, procedures
• Advertising
• Personnel Requirements
• Construction and Design
• Site Selection
• Furniture
• Fixtures and Equipment
• Product and Service
• Maintenance

The franchisee, in turn, agrees to the following:

• Pay the franchisor an initial franchisee fee, not for any product, service or specific assistance, but merely for the privilege of obtaining the franchise and the associated rights, and for the right to obtain the franchisor's know-how to enable the franchisee to operate that business in the most profitable fashion;
• Pay the franchisor a continuing royalty in return for the franchisor's continuing assistance and for the on-going privilege of using the franchisor's know-how, systems and methods;
• At all times conduct the franchised business in strict compliance with the franchisor's standards, procedures, policies and specifications, and to adhere to all such requirements throughout the life of the franchise relationship;
• Use the franchisor's name, trademark and service mark;
• Adhere to the franchisor's standard bookkeeping specifications and to submit to the franchisor required reports;
• Undergo and successfully complete the franchisor's training program;
• Not divulge to a third party any confidential information, knowledge or know-how conveyed to the franchisee by the franchisor;
• Purchase all required products, supplies, and materials only from suppliers designated or approved in writing by the franchisor, or from the franchisor itself;
• Not relocate the franchise without first informing the franchisor and, in some cases, obtaining the franchisor's approval;
• Comply with all employee hiring and training requirements;
• Consent to inspections by franchisor to determine compliance with franchisor's policies and procedures; and
• Discontinue, upon termination or expiration of the franchise, use of the franchisor's name, trademark and service mark; cease operating or doing business under any name or in any manner which might cause the public to believe that a franchise relationship with the franchisor still exists; and immediately and forever cease using, in any manner, the franchisor's trade secrets, procedures, techniques, systems, standards, specifications, and services.

The LFA recommends a potential franchisee consider the following:

• The experience required in the chosen franchise business
• A complete understanding of this business
• The commitment necessary to run the business
• Who the franchisor is, its track record and the business experience of its officers and directors
• How other franchisees in the same field are doing
• The cost of buying into the franchise
• The cost of the continuing to operate the business
• If there are any products or services you must buy from the franchisor and how and by whom they are supplied
• The terms and conditions under which the franchise relationship can be terminated or renewed
• How many franchisees have left the franchisor during the past few years
• The financial condition of the franchisor and its system
 

The LFA, through its database and network, helps identify franchise companies in more than 20 kinds of businesses. We advise that you “shop wisely” -- determine how much you can afford to invest and where to obtain financing. Careful investigation prior to purchasing a franchise is mandatory. You need to examine what the franchise relationship entails. For instance, you need to ask about the training and support provided, assistance in finding and developing a location, and the sources of inventory and supplies. You should research the company’s growth and its prospects for future growth. You should also seek advice from professionals and business people you respect. Investing in a franchise: The financial investment depends on the industry and the type of business. Start-up costs can range from $50,000 or less to over $1,000,000, depending on the franchise selected, and whether it is necessary to own or lease premises to operate the business. The average investment, excluding premises, is between $350,000-$400,000. LFA offers all the initial general information.